RBI Governor Urjit Patel has left. Now what?

Understanding the background of Monday’s extraordinary development, and what might follow.

Is this the first time that an RBI Governor has resigned in the context of conflict with the government?

Not quite — even though the earlier situations arose several decades ago. The first Governor, Sir Osborne Smith, who took over on April 1, 1935, left office on June 30, 1937, before completing his term of three and a half years, apparently following differences with the Government’s Member, Finance.

Sir Benegal Rama Rau, who served as Governor from July 1, 1949 to January 14, 1957, resigned before the end of his second extended term following serious differences with Finance Minister T T Krishnamachari. Prime Minister Jawaharlal Nehru did not back Rama Rau.

Now that Governor Urjit Patel has resigned, who is in charge at the Reserve Bank?

Section 7(2) of the RBI Act says “the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank”.

Section 7(3) says: “Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.”

Sub-section 1 of Section 54A of the Act, which deals with the ‘Delegation of Powers’, says the “Governor may, by general or special order, delegate to a Deputy Governor… such of the powers and functions exercisable by him…” The RBI General Regulations, 1949, also provide for the delegation of powers.

Now that the Governor himself has quit, the seniormost Deputy Governor — N S Vishwanathan, who has been in the post from July 4, 2016 onward — may be assigned his powers. More than three decades ago, Deputy Governor Amitabh Ghosh was made Governor for 20 days (January 15-February 4, 1985) after Manmohan Singh left the RBI to move to the Planning Commission in New Delhi on January 14, 1985, and his successor, the then Finance Secretary R N Malhotra, was yet to take over.

Who will now chair the important RBI meeting that is scheduled for December 14?

If a new Governor is appointed over the next few days, obviously, he will chair the meeting. If the government does not make an appointment, and should the RBI Central Board still decide to go ahead with the meeting, the seniormost Deputy Governor could chair it.

After the November 19 Board meeting, it had appeared that the most contentious issues between the RBI and the government had been resolved. In that background, what does Governor Patel’s sudden resignation indicate?

From the relatively sober comments from some of the more aggressive members of the Board, as also from several off-the-record briefings, it did indeed appear then that many differences had been sorted out. There was, in fact, progress on issues such as funding support for small and medium enterprises, which was of concern to some Board members as well as the government.

But the easing of rules to enable almost a dozen state-owned banks to come out of the Prompt Corrective Action (PCA) framework, which imposes severe restrictions on lending among other things, is yet to be approved by the RBI — even though it was discussed at the last Board meeting.

Other thorny issues — such as the special funding dispensation to Non Banking Finance Companies which have complained of a liquidity squeeze but which the RBI has disputed, and the appropriate economic capital of the RBI and the surplus which it should transfer to the government — too, remain unresolved. At the last Board meeting, it was decided that an expert committee would deliberate on this; however, there have been differences on the composition of the committee.

How is the Governor’s resignation expected to impact the institutional relationship between the RBI and the government?

RBI’s operational independence as the lender of last resort, the institution in charge of ensuring the financial stability of the country, and the nation’s debt manager, has long been acknowledged. The Governor has always been seen as much more than just a financial sector regulator — Raghuram Rajan once said there were good reasons why Governors of central banks sat at G-20 meetings along with Finance Ministers.

However, there have been signs in recent years that the relationship between the RBI and the government could undergo a fundamental change — to the disadvantage of the Bank.

What will be the likely impact on the markets, and on the larger economy?

In the near term, the financial markets are bound to be impacted. Indian markets had closed for the day when the news of Patel’s resignation came, but the Near Deliverable Forward or NDF market, which is the offshore market for the Indian rupee, reacted with the currency.

The uncertainty at the RBI and monetary management policies will weigh on the minds of market participants — especially in the bond markets, but also in equities, on foreign investors who have bet on Indian stocks, and on corporate offerings. This would mean a hit on sentiment and possibly higher cost of borrowings in the near term, and difficulties in raising funds from the capital market.

When and how will the process of appointment of the new Governor start?

Unlike in the UK, Canada, and some other Western jurisdictions, there is no formal search process to select the RBI Governor. There is no formal call for applications, and the Prime Minister and Finance Minister have traditionally chosen from names on a shortlist. Before the appointment of Governor Duvvuri Subbarao in 2008, Finance Minister P Chidambaram and Chairman of the PMEAC C Rangarajan met some candidates for “interactions”, including Subbarao, who was then Finance Secretary, RBI Deputy Governor Rakesh Mohan, and HDFC Chairman Deepak Parekh.

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